City Government

New York almost went bankrupt thirty years ago, they say, because neither the city’s politicians nor its business leaders squarely faced tough budget realities.

This year offers a sharp contrast. The five leading candidates for mayor have made tangible proposals to address the city’s future multi-billion-dollar annual deficits. And there was an unusually provocative and high level of discussion during the public hearings of Mayor Michael Bloomberg’s Charter Revision Commission, as the transcripts of those meetings should make clear.

In the end, the commission embraced just one relatively minor fiscal change to place on the ballot in November. It will be Question 4. At the same time, though, the commission’s August 2 final report
has very useful
sections devoted to issues that deserve future action

Referendum Question 4

When the
Financial Emergency Act was enacted in the late 1970s, it was in response to the city’s
1975 fiscal crisis. The law, which strictly dictates city budget practices, is due to expire in 2008, and one question facing the charter commission was what parts of this state law should be
transferred to the city charter.

The city has for more than 25 years followed very specific state rules about
what kinds of information must be provided to the state and what
budget-balancing goals must be achieved. It’s this information that fiscal monitors
such as the city comptroller and the state deputy comptroller for New York
City, as well as the city’s Independent Budget Office â€“ all three
representing the public interest -- use for their important budget reports.

Until 1986, the state had to approve the city’s budget before it could go
into effect. Since then the city sets its budget without such approvals, but
the state â€“ through the governor-controlled Financial Control Board
-- has remained a year-round monitor of the
city budget, holding the power to demand budget information from the city.
And should the city’s budget be out of balance by more than $100 million at
fiscal year end, the Financial Control Board would re-instate a “control period” and again make
the city budget subject to state approval.

The mayor, not surprisingly, thinks that after almost 25 years of balancing
the budget every year, the city has earned the right to more
independence. But there are at least two big cautions. One is the fear that mayors may start limiting access to information that the state required. This would keep the fiscal monitors â€“ and the public â€“ from fully understanding the fiscal picture.

The second caution is that future mayors might use their new independence to
repeat some of the bad habits -- like borrowing money for operational
expenses -- that precipitated the 1975 near-bankruptcy in the first place. In fact, in his July
2005 report on the city’s
financial plan, the state deputy comptroller bluntly recommends that the
Financial Emergency Act “should remain in effect indefinitelyâ€¦.The prospect
of a control period provides the city with an added incentive to adopt its
budget on time and to maintain fiscal discipline.”

So Question 4 will be far from the end of the story. As 2008 approaches, the state deputy comptroller will not be the only one likely to push for
maintenance of the current state controls. As it stands, however, Question 4
on the ballot will dodge these cautions and simply require:

Preparation of a balanced budget and ending the year without a deficit

Maintenance of the current four-year financial plan and quarterly
modifications

A general reserve of at least $100 million to cover shortfalls

More restrictions on short-term city borrowing

More conditions on the annual audit of city finances mandated by the
charter

Issues Deferred

In its final report, the commission detailed three “Issues of Fiscal Stability for Future Consideration.”

The first is the old
suggestion of a rainy day fund. Such a fund would set aside one year’s
budget surplus for use, under specific circumstances, in future years. The
topic, however, has yet to receive serious analysis.

As things stand now, the city must spend any surplus in the year of the
surplus â€“ which the city does by pre-paying expenses for the next year. The
most recent criticism of this practice is the state deputy comptroller’s
report, in which he points out that the city’s $3.5 billion surplus from
fiscal year 2005 is the major part of some $4.6 billion in non-recurring
(“one-shot”) revenues in the current 2006 budget. (One-shot revenues that
exceed $1 billion have long been attacked by the state financial control
board.) However, the commission found the topic too complex to tackle.

The second issue was to consider strengthening the link between local legislation and the budget â€“ to pay the cost of any new law. Currently, the city charter requires that any
local law contain a fiscal impact statement, but there is no requirement to pay for the impact.

The third issue, raised by several individuals and organizations, is
increasing linkages between programs and the budget (and a suggestion of
this writer, one of some 100 persons interviewed by the commission chair and
senior staff). One of the commissioners described the current problem as
“insufficient articulation of planning for programmatic priorities in the
current process.” As the report says, the present charter does not preclude
presenting a “program budget,” one that links specific program goals to
specific dollars spent.

Unfortunately, the commission’s suggestion in this third area is tepid,
urging interested organizations to work with the Office of Management and
Budget to “resolve obstacles to a programmatic restatement” of budget
information â€“ a goal that OMB has shown no interest in over the past decade.

Accountability Deferred

Another section of the final commission report, “Agency
Efficiency, Effectiveness and Accountability,” tells the story of the
commission’s ultimately unsuccessful attempt to be “accountable about
accountability.” This admirable goal was perhaps fatally dogged by the
inherent contradictions in a commission named by the mayor and staffed by
the mayor’s employees.

The commission itself -- the most representative and distinguished
commission since the charter revision commissions in the late 1980s â€“ seemed
uncomfortable with the idea that a mayoral-dominated commission on public
reporting would review and judge the effectiveness of some 33
charter-mandated reports that presumably provide information about
government effectiveness.

To the credit of the commission and its staff, they amended the proposal in the face of widespread criticism. More to their credit, after
further criticism, the commission abandoned the proposal altogether at its
penultimate public meeting, on August 1.

The Candidates Progressive Revenue Proposals

While the interesting summer-long work of the charter revision commission
had an air of abstract and esoteric musing about the city budget, mayoral
candidates were slugging away at real budget decisions, as can be seen in
Gotham Gazette’s Campaign 2005
coverage. With most discussions of federal and state politics dominated by
tax cutting and diminished government spending, their focus on revenues is
refreshing.

One way of looking at revenues in the mayoral campaign is to start with
Mayor Bloomberg’s 18.5 percent increase in the city’s average property tax
rate (approved by the City Council) in November 2002. In retrospect, two
things are striking about that action. One, it was done quickly, in less
than three weeks, with essentially no public debate; and second, so far that
nearly $2 billion increase does not seem to have affected the mayor’s
re-election prospects. It may be that tax increases carefully explained are
more acceptable to residents than often assumed.

The mayor, of course, softened criticism of his property tax hike (and
deflected attention from ancient inequities in the city’s property tax
system) by giving homeowners an annual $400 rebate. Council Speaker Gifford
Miller has countered with the interesting idea of a renter’s tax credit:
currently renters pay a substantial part of their landlord’s property taxes
in their rent, but get no rebate. Since the average renter makes less money
than the average homeowner, this would have a progressive impact.
Miller would also double the city’s earned-income-tax-credit, which would
provide additional relief for lower-income workers.

Miller and Congressman Anthony Weiner would also keep or raise higher taxes
for higher-income New Yorkers, another progressive move. For instance, the
State Deputy Comptroller’s July report gives the latest estimate on the
full-year (in fiscal 2007) loss of revenues from the expiring higher-income
tax rates at the end of this calendar year: $600 million.

Former Bronx Borough President Fernando Ferrer has proposed another
progressive tax to raise $1 billion for education, a stock transfer tax, at
a much smaller rate than the transfer tax that was eliminated in 1981.

With the exception of the renter’s tax credit, all of these progressive
suggestions have been in place at one time or another. Elected officials,
however, have rarely stuck with them, content to increase or lower taxes
with a shifting political climate. They generally increase taxes, as Mayor
Bloomberg did in November 2002, only when forced to. Thus the several months
of open discussion about all of these tax options is a welcome phenomenon,
one that might better address long-term budget stability than did the
charter revision commission.

Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001.Â

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